“the market” returns “8% on average over time” why is the withdrawl rate to make my retirement last 30 years only 4% ? Seems like it should last forever at 4%
In: Mathematics
The [Trinity Study](https://en.wikipedia.org/wiki/Trinity_study) is what a 4% Safe Withdrawal Rate is based on. What you need to consider is that the withdrawals may exceed the income earned by the portfolio, and the total value of the portfolio may well shrink during periods when the stock market performs poorly.
You have a higher risk when “the market” goes *down* early on in your withdrawal period, compounded with a high withdraw rate; as you cannot bounce back from $0.
The Trinity Study determined that the 4% withdrawal rate would succeed almost 100% of the time over a 30 year period.
Because 8% is an average return with pretty aggressive investments like stocks/ETFs. When you are in retirement you want to have less risky investments since you don’t want your retirement portfolio to lose 20% in value like the S&P500 did a couple years ago. So in retirement a lot of your portfolio should be in less risky bonds.
Well a) when you’re in the withdraw phase, you won’t be invested fully in assets that return an average of 8%. You’ll be in assets that are less volatile, but with lower growth.
And b) 30 years is a long time. There will be ups and downs. There will be some years where you take out less than you earned, and some years where you take out more. Since it’s your only source of income, you have no choice but to make withdrawals during those down years, even if doing so drains your portfolio. So the math guys did the math, and founs that 4% is a “safe” rate that will make it very likely that, even with down years, your portfolio will still last 30 years. Which, if you retire at 67, is probably long enough to outlive you.
I thought it was because you’re starting by withdrawing 4% of the initial amount, and increasing that base amount by 3% for inflation each year. The combination of the above will give the money a 95ish percent chance of lasting 30 years. With the understanding that the 8% average over time returns includes some large, long periods of losses, and that sequence of returns risk could definitely kill your spending plan.
The answer is sequence of return risk. Imagine if you start your retirement today and the market drops 20% today, if you took a large withdrawal, your portfolio would never recover. As such, you have to be more conservative when forecasting
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